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Show SUMMARY OF FINDINGS The cost of ratemaking represents another important element of the ratemaking discussion. In 1995 dollars, it is hard to imagine a credible, but basic, cost- of- service study costing less than $ 10,000. A detailed cost- of- service study can cost $ 20,000 or more. Consultant costs can easily exceed $ 100,000 for a cost- of- service study that includes the analysis of marginal costs, and development of models and rates based on marginal costs. It is easy to say that all purveyors should be performing basic cost- of- service reviews. Many utilities do. However, relatively small utilities of all types ( water, wastewater, electric, natural gas, solid waste, and telephone) routinely go for many years without reviewing cost- of- service for reasons that include administrative cost, single customer class pricing, and the institutional issues discussed earlier. Another issue is the cost of data collection and database maintenance. Cost- of- service studies require customer class statistics and detailed cost information. Assuming the Water Usage Inventory Questionnaire responses accurately reflect the level of data maintained by small purveyors, such purveyors lack the data required to perform detailed cost- of- service studies. Small purveyors would incur significant costs to develop and maintain data bases they currently lack. Study and data base development costs should not be construed as rational reasons for a complete failure to pursue pricing and conservation policies. Cost does, however, impose constraints on the depth at which small utilities can reasonable be expected to review the issues. WHOLESALE WATER PRICING The wholesale water pricing topic encompasses at least three issues. First is the relationship between the level of wholesale water costs and the level of retail water rates. Second is the possible use of wholesale water rates as a water conservation tool unto themselves. Third is the imposition of conditions of service on those purchasing water from the wholesale entity. Relationship of Wholesale Water Costs to Retail Rates A change in the price structure of a wholesale agency will ultimately affect the retail agency's customers ( assuming no subsidization occurs). A wholesale price increase causes an increase in the operating costs of retail utilities. To meet their revenue requirements, most retailers must pass the increased cost to their customers in the form of increased retail rates. The ultimate increase will be a function of the magnitude of the price increase imposed by the wholesaler and the relative supply provided to the retailer by the wholesaler. The direct impact can vary enormously given that wholesale water purchases can vary, as a percent of total water requirements, from zero percent to 100 percent. ES- 9 Executive Summary |